Views on the Bitcoin Bubble

In my previous post I highlighted some of the arguments made by Jerry Brito and Timothy B. Lee reflecting on Bitcoin’s prospects for success. Since then, Bitcoin has experience explosive growth witnessing over a 1000% increase in value in May and reaching a whopping 30$ per Bitcoin valuation later in June. However most recently, Mt Gox, Bitcoin’s most popular exchange platform, suffered a hack attack which resulted in Bitcoin plummeting in value to just a few pennies. In this post I will go over Bitcoin’s growth, speculations of a Bitcoin bubble, and the hack.

Right after Jerry published his article, Bitcoin’s value increased from around 0.8$ to just below 2$. Jerry was keen to point out that correlation is not causation, and that his post did not single handedly cause the jump in value, but that the overall increasing attention and speculation of mainstream adoption has been pushing demand upwards. Moreover, on June 1st Gawker published an article on Silk Road, an anonymous website for buying illegal drugs that used bitcoin. The price of bitcoin doubled within two days and quadrupled within a week, and buying a bitcoin cost more than $30.

Such events have spurred talks all over the web of the likelihood of a Bitcoin bubble. Columnist Daniel Rothschild weighed in on the matter. He argued that since the total number of BitCoins in existence will level out at about 21 million by 2140, and given that the current (at the time of the post) value of a Bitcoin is 1.15$, the total value of the Bitcoin market would approach 25 million dollars 129 years from now. Far too little for a bubble. Now let’s adjust these numbers to the highest valuation of a Bitcoin yet, 30$. The total market market value of Bitcoins would be then (by 2140) 630 million dollars. But taking 130 years of inflation into account, fear of a Bitcoin bubble still seem unwarranted.

Daniel concluded his post stating his doubts that Bitcoin will even still be around 10 years from now. His concern over Bitcoin's future has been expressed by many experts on the web. Some pundits have predicted Bitcoin’s demise based on inherent flaws, such as Timothy B. Lee’s posts, discussed in my previous post. Others argued that the possibility to conduct unlawful activities using Bitcoins poses serious threat to its adoption and success. Author and futurist Bruce Sterling was quoted saying on this issue: "Any anarchist cyberscheme like bitcoin will rapidly attract the Four Horsemen of the Infocalypse: Mafia, drug dealers, terrorists, and child pornography.” Finally, probably the most imminent threat comes from cyber attacks. Most recently hackers have hit Mt. Gox, the world's largest exchange for Bitcoins, causing 8.75 million dollars in damage. 60 000 accounts listed on the exchange's database were compromised causing a 100 000 Bitcoin sell-off. Despite Mt. Gox’s efforts to restore the system, invalidating post-hack trades and restoring the price to where it was at before the run on the exchange, the hack dealt a huge blow to user’s confidence using Bitcoin.

Finally, I would like to conclude this post with a quote from Jerry Brito reflecting on the Bitcoin phenomenon in response to Timothy’s arguments:

“There may well be a Bitcoin bubble, and it may even be likely. But again, I think that misses the greater point about what Bitcoin represents. Bitcoin may be tulips and the bubble may burst, but the innovation—distributed, anonymous payments—is here to stay. Napster went bust, but its innovation presaged BitTorrent, which is here to stay. Could the Bitcoin project itself go bust? Certainly, but the innovation solving the double-spending problem I’ve been talking about, will be taken up and improved by others, just as other picked up and ran with Napster’s innovation.”